Exam 1: The Equity Method of Accounting for Investments

REFERENCE: Ref.01_14 Acker Inc.bought 40% of Howell Co.on January 1,2008 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. -What is the amount of unrealized intercompany inventory profit to be deferred on December 31,2009?

REFERENCE: Ref.01_11 On January 4,2008,Mason Co.purchased 40,000 shares (40%)of the common stock of Hefly Corp. ,paying $560,000.At that time,the book value and fair value of Hefly's net assets was $1,400,000.The investment gave Mason the ability to exercise significant influence over the operations of Hefly.During 2008,Hefly reported income of $150,000 and paid dividends of $40,000.On January 2,2009,Mason sold 10,000 shares for $150,000. -What is the appropriate journal entry to record the sale of the 10,000 shares?

Idler Co.has an investment in Cowl Corp.for which it uses the equity method.Cowl has suffered large losses for several years,and the balance in the investment account has been reduced to zero.How should Idler account for this investment?

How does the use of the equity method affect the investor's financial statements?

How would a change be made from the fair value method to the equity method?

What argument could be made against the equity method?

REFERENCE: Ref.01_08 On January 4,2007,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values. During 2007,Bike reported net income of $500,000.For 2008,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years. -How much income did Harley report from Bike for 2008?

REFERENCE: Ref 01_01 On January 3,2008,Austin Corp.purchased 25% of the voting common stock of Gainsville Co. ,paying $2,500,000.Austin decided to use the equity method to account for this investment.At the time of the investment,Gainsville's total stockholders' equity was $8,000,000.Austin gathered the following information about Gainsville's assets and liabilities: SHAPE \* MERGEFORMAT For all other assets and liabilities,book value and fair value were equal.Any excess of cost over fair value was attributed to goodwill,which has not been impaired. -What is the amount of goodwill associated with the investment?

REFERENCE: Ref.01_07 On January 1,2007,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.On January 1,2008 Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2007,was $1,000,000.The book value of Cook on January 1,2008,was $1,150,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years: On ,April 1,2009,just after its first dividend receipt,Mehan sells 10,000 shares of its investment. -How much income did Mehan report from Cook during 2007?

REFERENCE: Ref.01_15 Cayman Inc.bought 30% of Maya Company on January 1,2008 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows: Maya reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. -What is the amount of unrealized inventory gain to be deferred on December 31,2009?

On January 2,2008,Heinreich Co.paid $500,000 for 25% of the voting common stock of Jones Corp.At the time of the investment,Jones had net assets with a book value and fair value of $1,800,000.During 2008,Jones incurred a net loss of $60,000 and paid dividends of $100,000.Any excess cost over book value is attributable to goodwill with an indefinite life. Required: 1)Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2)Prepare a schedule to show the balance in Heinreich's investment account at December 31,2008.

Charlie Co.owns 30% of the voting common stock of Turf Services Inc.Charlie uses the equity method to account for its investment.On January 1,2008,the balance in the investment account was $624,000.During 2008,Turf Services reported net income of $120,000 and paid dividends of $30,000. What is the balance in the investment account as of December 31,2008?

You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment.How would you verify that the equity method is appropriate in this case?

On January 1,2008,Spark Corp.acquired a 40% interest in Cranston Inc.for $250,000.On that date,Cranston's balance sheet disclosed net assets of $430,000.During 2008,Cranston reported net income of $100,000 and paid cash dividends of $30,000.Spark sold inventory costing $40,000 to Cranston during 2008 for $50,000.Cranston used all of this merchandise in its operations during 2008.Any excess cost over fair value is attributable to an unamortized trademark with a 20 year remaining life. Required: Prepare all of Spark's journal entries for 2008 to apply the equity method to this investment.

Jager Inc.holds 30% of the outstanding voting shares of Kinson Co.and appropriately applies the equity method of accounting.Amortization associated with this investment equals $11,000 per year.For 2008,Kinson reported earnings of $100,000 and paid cash dividends of $40,000.During 2008,Kinson acquired inventory for $62,400,which was then sold to Jager for $96,000.At the end of 2008,Jager still held some of this inventory at its transfer price of $50,000. Required: Determine the amount of Equity in Investee Income Jager should have reported for 2008.

REFERENCE: Ref.01_13 On January 1,2008,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Rob Co.reported net income of $300,000 for 2008,and paid dividends of $100,000 during that year. -What is the balance in Jackie Corp's Investment in Rob Co.account at December 31,2008?

REFERENCE: Ref.01_12 On January 4,2008,Bailey Corp.purchased 40% of the voting common stock of Emery Co. ,paying $3,000,000.Bailey properly accounts for this investment using the equity method.At the time of the investment,Emery's total stockholders' equity was $5,000,000.Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed: Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Emery Co.reported net income of $400,000 for 2008,and paid dividends of $200,000 during that year. -How much goodwill is associated with this investment?

REFERENCE: Ref.01_09 On January 1,2008,Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000,which approximated book value.During 2008,Barney paid dividends of $30,000 and reported a net loss of $70,000. -Luffman Inc.owns 30% of Bruce Inc.and appropriately applies the equity method.During the current year,Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000.At year-end,all of the merchandise had been sold by Luffman to other customers.What amount of unrealized intercompany profit must be deferred by Luffman?

REFERENCE: Ref.01_02 Starge Inc.owns 30% of the outstanding voting common stock of Ticker Co.and has the ability to significantly influence the investee's operations and decision making.On January 1,2008,the balance in the Investment in Ticker Co.account was $402,000.Amortization associated with this acquisition is $8,000 per year.During 2008,Ticker earned an income of $108,000 and paid cash dividends of $36,000.Previously in 2007,Ticker had sold inventory costing $28,800 to Starge for $48,000.All but 25% of this merchandise was consumed by Starge during 2007.The remainder was used during the first few weeks of 2008.Additional sales were made to Starge in 2008;inventory costing $33,600 was transferred at a price of $60,000.Of this total,40% was not consumed until 2009. -What was the balance in the Investment in Ticker Co.account at the end of 2008?

What is the balance in the Investment in Stanley Corporation on December 31,2008?